Since the start of the Covid Pandemic it is arguable that UK businesses have been given unprecedented protection from enforcement action by creditors. With so many of these safeguards being lifted in October 2021, new legislation has indeed created a partial relaxation of the ban on issuing winding up petitions until 31st March 2022. However, in the present climate, creditors can utilise Winding Up Petitions to reclaim their money with certain criteria’s being applied.
What are the new rules for issuing winding up petitions?
Small companies, or at least those companies owing small amounts are still excluded from the threat of Winding Up Petitions in so much that a creditor must be owed a minimum of £10,000 to issue a petition.
Much to many landlords’ frustrations however, they remain out in the cold, unable to present a petition for unpaid commercial rent of any amount until the end of March 2022.
A creditor must issue a written notice of the debt to the debtor and ask for payment proposals. At this point the debtor has 21 days from the date of the notice to make a payment proposal ‘satisfactory to the creditor’. The notice from the creditor must refer to the 21-day proposal period, or else the notice could be deemed to be invalid.
What is a “satisfactory” proposal and who decides?
Arguably the legislation for these new arrangements allows the creditor to decide what it thinks is satisfactory. There is no requirement for the creditor to negotiate with the debtor although the new law does require the creditor to state in the subsequent winding up petition why it considers the proposals unsatisfactory.
The law lacks any transparency in terms of whether the debtor and the court are expected to take this explanation at face value or whether the court will apply some level of scrutiny before making a winding up order against the debtor. This uncertainty will surely soon be tested within the courts, but in the meanwhile, it will remain a serious concern for struggling debtors.
With regards to Creditors, pending such clarifications it will be unwise to either arbitrarily or irrationally reject a fair and reasonable proposal. One should also consider whether the proposal offers them a better recovery than would be likely if the debtor went through a formal insolvency process.
What should be included in a Payment Proposal?
The debtor must explain in their proposals the rationale for the payment offer they make, in particular aspects such as:
· Cashflow Projections
· Competing creditor pressures
· Cash Resources
· Future trading prospects
· What actions are been taken to improve their financial position.
All of these issues are likely to be taken into consideration by the court if it chooses to exercise scrutiny over the process.
It is clear that both creditors and debtors are advised to obtain independent advice on aspects of this new system, especially around whether a proposal is satisfactory or not. For debtors in particular, putting together their proposal will involve a review of their financial situation and prospects, which ultimately may be tested within a court environment.
What impact will this have on lenders?
As most people are aware, most commercial lending agreements include a requirement for the borrower to inform the lender if it receives a winding up petition. Under such circumstances this also allows the lender the right to freeze bank accounts once a petition has been issued.
The new 21-day proposal period introduces a new ‘limbo’ period. As such it is highly likely that banks will no doubt seek to introduce an additional requirement to be notified when a borrower receives the creditor’s written notice of a debt and its call for payment proposals.
How lenders will react in these circumstances and what actions they take, remains to be seen.
How can Lucas Ross- Business Rescue, Recovery & Insolvency help?
If you are worried or have been served with a Winding Up Petition then Lucas Ross – Business Rescue, Recovery & Insolvency are here to help. Contact us to arrange a no obligation and confidential call with one of our team on 0330 128 9489 or email us help@lucasross.co.uk.
